Pharmaceutical company Elanco Animal Health is taking Wall Street by surprise today, falling to $13.21 and marking a -5.3% change compared to the S&P 500, which moved 0.0%. ELAN is -30.97% below its average analyst target price of $19.13, which implies there is more upside for the stock.
As such, the average analyst rates it at buy. Over the last year, Elanco Animal Health shares have outstripped the S&P 500 by 11.4%, with a price change of 46.2%.
Elanco Animal Health Incorporated, an animal health company, innovates, develops, manufactures, and markets products for pets and farm animals. The company is part of the healthcare sector. Healthcare companies work in incredibly complex markets, and their valuations can change in an instant based on a denied drug approval, a research and development breakthrough at a competitor, or a new government regulation. In the longer term, healthcare companies are affected by factors as varied as demographics and epidemiology. Investors who want to understand the healthcare market should be prepared for deep dives into a wide range of topics.
Elanco Animal Health does not release its trailing 12 month P/E ratio since its earnings per share of $-2.55 are negative over the last year. But we can calculate it ourselves, which gives us a trailing P/E ratio for ELAN of -5.2. Based on the company's positive earnings guidance of $0.98, the stock has a forward P/E ratio of 13.5. As of the third quarter of 2024, the average Price to Earnings (P/E) ratio for US health care companies is 26.07, and the S&P 500 has an average of 29.3. The P/E ratio consists in the stock's share price divided by its earnings per share (EPS), representing how much investors are willing to spend for each dollar of the company's earnings. Earnings are the company's revenues minus the cost of goods sold, overhead, and taxes.
It’s important to put the P/E ratio into context by dividing it by the company’s projected five-year growth rate. This results in the Price to Earnings Growth, or PEG ratio. Companies with comparatively high P/E ratios may still have a reasonable PEG ratio if their expected growth is strong. On the other hand, a company with low P/E ratios may not be of value to investors if it has low projected growth.
Elanco Animal Health's PEG ratio of 1.8 indicates that its P/E ratio is fair compared to its projected earnings growth. Insofar as its projected earnings growth rate turns out to be true, the company is probably fairly valued by this metric.
To deepen our understanding of the company's finances, we should study the effect of its depreciation and capital expenditures on the company's bottom line. We can see the effect of these additional factors in Elanco Animal Health's free cash flow, which was $197.0 Million as of its most recent annual report. Free cash flow represents the amount of money available for reinvestment in the business or for payments to equity investors in the form of a dividend. In ELAN's case the cash flow outlook is weak. It's average cash flow over the last 4 years has been $179.8 Million and they've been growing at an average rate of -2.0%.
Another valuation metric for analyzing a stock is its Price to Book (P/B) Ratio, which consists in its share price divided by its book value per share. The book value refers to the present liquidation value of the company, as if it sold all of its assets and paid off all debts). Elanco animal health's P/B ratio indicates that the market value of the company exceeds its book value by a factor of 1.1, but is still below the average P/B ratio of the Health Care sector, which stood at 3.53 as of the third quarter of 2024.
Since it has a negative P/E ratio., a lower P/B ratio than its sector average, and positive cash flows with a flat trend, Elanco Animal Health is likely overvalued at today's prices. The company has poor growth indicators because of no PEG ratio and with a negative growth trend. We hope you enjoyed this overview of ELAN's fundamentals. Be sure to check the numbers for yourself, especially focusing on their trends over the last few years.
